Small steps won’t save marriage between Greece and euro zone

Share via e-mail

A trader reacts on the floor of the Madrid Bourse Wednesday, as European shares sank to new 2012 lows.

May 18, 2012

More and more, the relationship between Greece and the rest of the euro zone is like a marriage that, to everyone but the two people in it, seems doomed. Voters in many other euro countries — led by Germany, the prime force behind and greatest beneficiary of Europe’s common currency — have little stomach for further helping debt-ridden Greece avoid the consequences of its past overspending. Meanwhile, as their country’s economy plunges into despair, Greek voters are rebelling against the austerity prescribed by Berlin but have not coalesced around any realistic alternative. There’s still hope of a reconciliation, but bringing it about would require each side to adjust its outlook in ways that, recent history suggests, are entirely out of character.

European central bankers are now openly discussing the possibility of pushing Greece out of the euro. These threats may be productive if they persuade Greek politicians and voters not to seek a confrontation with the rest of the euro countries. And while keeping the euro zone whole still seems like a better course than the alternative, it will require structural reforms and some unpleasant sacrifices that affect the entire euro zone — not just Greece.

The steps euro zone leaders have taken so far have only been enough to postpone a catastrophe in Greece — two bailout plans, the more recent of which carried a price tag of $170 billion, and a $1.3 trillion loan fund from the European Central Bank to prevent the collapse of troubled euro countries’ banks. Yet confidence in Greece continues to erode. Meanwhile, the tough austerity measures Greek leaders promised to impose as a condition of the bailouts are causing genuine economic hardships, with predictable results on the country’s political scene: No party has been able to form a government after recent parliamentary elections, and the left-wing Syriza coalition has surged as a major political force by insisting that Greece can abrogate its promises to the countries that bailed it out and still stay in the euro. This is wishful thinking. Yet it’s also clear that after years of enforced austerity a stunted Greek economy would still struggle to pay off the country’s debts.

By leaving the euro and devaluing its new currency, Greece might see an end to the limbo it’s currently in, and its economy could begin to recover. Yet the immediate effects would be calamitous for Greek banks, debtors, and public finances, and panic would likely spread to the much bigger troubled economies of Spain and Italy.

Surely the results would be far better if euro zone nations chose a less precipitous course — engineering for Greece a gentler transition to a more dynamic, competitive economy with a sustainable level of public spending. Greece would have to surrender more control of its fiscal policies, and in return the rest of Europe, led by Germany, would have to provide debt relief and fiscal transfers to keep Greece afloat. This would be fair; the arrangement would implicitly recognize the reality that Germany’s export-driven economy long benefited from a euro exchange rate weighed down by weaker economies like Greece’s.

It’s convenient to believe Greece has uniquely mismanaged its own economy, and perhaps it has. Yet as this crisis has shown, Greece’s political culture isn’t alone in its inability to choose between grim options, and there’s an intrinsic problem with combining very different countries’ monetary policies without also aligning their spending priorities. The path of least resistance in this case is another series of grudging stopgap measures. That won’t save the marriage, and won’t bode well for the rest of Europe.